UK government borrowing costs hit an 18-year peak and the pound slid on Friday as the Labour Party’s leadership contest intensified, with Andy Burnham’s bid for a comeback to Parliament fueling investor anxiety.
The yield on 10-year government bonds — the interest rate the UK pays to borrow for a decade — climbed above 5.14%, the highest since 2008. The pound fell 0.3% against the dollar to roughly $1.337, extending a sharp decline late Thursday after Burnham announced his intention to run for a seat in the House of Commons.
Analysts attributed the market moves to concerns that a Burnham-led government would pursue higher borrowing and spending. “This is a sign that Burnham is the least market-friendly of all the candidates,” said Kathleen Brooks, research director at XTB. “Wes Streeting’s resignation did not have the same negative effect on the pound.”
Long-term borrowing costs also surged, with the yield on 30-year gilts reaching a 28-year high of 5.82%. While European borrowing costs rose broadly amid worries about the Iran conflict driving up energy prices, the UK’s increases were more pronounced.
Investors were rattled by Burnham’s past remarks, including a 2023 interview where he said the government must “get beyond this thing of being in hock to the bond markets.” Russ Mould, investment director at AJ Bell, noted that comment “helped push UK borrowing costs higher and seen the pound slump.”
Brooks warned that “UK politics is a mess” and pointed to signs of foreign investors exiting the gilt market. “If there is a major rout in the pound and/or gilts in the coming days, prospective candidates may need to assess whether now was a wise time to make a move against the PM,” she added.
The FTSE 100 index fell 1.7%, tracking broader European declines.
Burnham, the Mayor of Greater Manchester, confirmed he would seek the parliamentary seat of Makerfield after incumbent Josh Simons stepped aside. He vowed to “change Labour for the better” and “make politics work properly for people.” However, his path remains uncertain: he must first secure local party selection and then win a by-election contested by Reform UK.